Disinvestment

As tax collections slow down, govt fiscal deficit shoots to its highest level in 16 years

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010Vivek Kaul

The Controller General of Accounts declares the fiscal deficit number at the end of every month. The cycle works with a delay of month. So, at the end of November 2014, the fiscal deficit for the first seven months of the financial year (April to October 2014) was declared.
The fiscal deficit for this period stood at a rather worrying 89.6% of the annual target of Rs 5,31,177 crore. Fiscal deficit is the difference between what a government earns and what it spends.
One reason the fiscal deficit is number is so high is because the government’s expenditure is spread all through the year, whereas it earns a substantial part of its income only towards the end of the year. But even keeping that point in mind, the fiscal deficit for the first seven months of this financial year is substantially high than it usually has been in the years gone by.
For the period April to October 2013, the fiscal deficit had stood at 84.4% of the annual target for that year. In fact, the accompanying table shows us that the fiscal deficit for the first seven months of this financial year has been the highest over the last sixteen years. 

PeriodFiscal deficit as a proportion of the annual target
April to Oct 201489.60%
April to Oct 201384.40%
April to Oct 201271.60%
April to Oct 201174.40%
April to Oct 201042.60%
April to Oct 200961.10%
April to Oct 200887.80%
April to Oct 200754.50%
April to Oct 200658.60%
April to Oct 200560.90%
April to Oct 200445.20%
April to Oct 200356.00%
April to Oct 200251.50%
April to Oct 200154.50%
April to Oct 200045.70%
April to Oct 199972.20%
April to Oct 199867.00%

Source: www.cga.nic.in

Also, I couldn’t look for data beyond 1998, given that it wasn’t available online. The table makes for a very interesting reading. The fiscal deficit level up to October 2007 was under control. It took off once the government decided to crank up expenditure to meet its social obligations.
Further, the average fiscal deficit for the first seven months of the year between 1998 and 2013 stood at 61.75% of the annual target. Hence, the number for this year at 89.6% of the annual target, is very high indeed.
Why has this happened? The income of the government during the period has gone up by only 5.3%. The budget presented in July earlier this year assumed that the income would grow by 15.6% in comparison to the last financial year.
The collection of direct as well as indirect taxes has been significantly slower than what was assumed. The direct taxes (corporation and income tax primarily) were assumed to grow at 15.7% in comparison to the last financial year. They have grown at only 5.5%.
The indirect taxes (customs duty, excise duty and service tax) were supposed to grow at 20.3%. They have grown by only 5.9%. In fact, within indirect taxes, the collection of customs duty has fallen by 1.7%.
What this clearly tells us is that the finance minister Arun Jaitley made very aggressive assumptions when it came to growth in tax collection and will now have a tough time meeting the numbers.
What makes the situation worse is the fact that Jaitley’s predecessor, P Chidambaram, had made the same mistake. In fact, in 2013-2014, Chidambaram had projected a total gross tax collection of Rs 12,35,870 crore. The final collection stood around 6.2% lower at Rs 11,58,906 crore. Given this, Jaitley could have avoided falling into the same trap and worked with a more realistic set of numbers. But then those projections wouldn’t have projected “acche din”, the plank on which the Bhartiya Janata Party had fought the Lok Sabha elections.
Even with such a huge fall in tax collections, Chidambaram managed to beat the fiscal deficit target that he had set by essentially pushing expenditure of more than Rs 1,00,000 crore into the next financial year (i.e. the current financial year 2014-2015).
Chidambaram essentially ended up passing on what was his problem to Jaitley. Jaitley cannot do that because he will continue to be the finance minister (or someone else from the BJP government will).
So what can Jaitley do if he needs to meet the fiscal deficit target of Rs 5,31,177 crore or 4.1% of GDP that he has set? The first thing that will happen and is already happening is that the plan expenditure will be slashed. The plan expenditure for the first seven months of the year fell by 0.4% to Rs 2,66,991 crore.
This was the strategy followed by Chidambaram as well in 2013-2014. The plan expenditure target at the time of the presentation of the budget was at Rs 5,55,322 crore. The actual number came in 14.4% lower at Rs 4,75,532 crore. This is how a major part of government expenditure was controlled.
The government expenditure is categorised into two kinds—planned and non planned. Planned expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government.
Non-plan expenditure is an outcome of planned expenditure. For example, the government constructs a highway using money categorised as a planned expenditure. But the money that goes towards the maintenance of that highway is non-planned expenditure. Interest payments on debt, pensions, salaries, subsidies and maintenance expenditure are all non-plan expenditure.
As is obvious a lot of non-plan expenditure is largely regular expenditure that cannot be done away with. The government needs to keep paying salaries, pensions and interest on debt, on time. These expenses cannot be postponed. Hence, the asset creating plan expenditure gets slashed.
The second thing that the government is doing is not passing on the benefit of falling oil prices to the consumers. It has increased the excise duty on petrol and diesel twice, since deregulating diesel prices in October.
The third thing the government will have to do is to get aggressive on the disinvestment front in the period up to March 2015. The disinvestment target for the year is Rs 58,425 crore. But until now the government has gone slow on selling shares that it owns both in government and non-government companies because of reasons only it can best explain.
The recent sale of shares in the Steel Authority of India Ltd(SAIL) was pushed through with more than a little help from the Life Insurance Corporation of India and other government owned financial firms. This is nothing but moving money from one arm of the government to another arm. It cannot be categorised as genuine disinvestment.
This is something that Chidambaram and the UPA government regularly did in order to meet the disinvestment target. Despite this they couldn’t meet the disinvestment target in 2013-2014. The government had hoped to earn Rs 54,000 crore but earned only Rs 19,027 crore.
Also, selling assets to fund regular yearly expenditure is not a healthy practice. If at all the government wants to sell its stake in companies, it should be directing that money towards a special fund which could be used to improve the poor physical infrastructure throughout the country. Right now, the money collected through this route goes into the Consolidated Funds of India.
In the months to come we could also see the government forcing cash rich companies like Coal India (which has more than Rs 50,000 crore of cash on its books) to pay a special interim dividend to the government, as was the case last year.
This is the way I see things panning out over the next few months. Nevertheless, the proper thing to do would be to put out the right fiscal deficit number, instead of trying to use accounting and other tricks to hide it.
The first step towards solving a problem is to acknowledge that it exists.

The article originally appeared on www.equitymaster.com as a part of The Daily Reckoning, on Dec 11, 2014

Why the disinvestment process is getting messier

market fall
Vivek Kaul

This song from the 1968 Hindi movie Teen Bahuraniyan best explains the state of the Congress party led United Progressive Alliance government. As the lines from the song go “aamdani atthani kharcha rupaiya, bhaiya, na poocho na poocho haal, nateeja than than gopal”. Loosely translated this means that when you keep spending more than what you earn, you are bound to end up in a mess sooner rather than later.
One area where the mess is getting more obvious by the day is the area of disinvestment of shares held by the government in public sector companies. The idea was that by selling these shares the government would be able to reduce a part of its fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
During the course of this financial year (i.e. the period between April 1, 2012 and March 31, 2013) the government had expected to earn Rs 30,000 crore by selling shares of public sector companies to the public. This number has since been revised to Rs 24,000 crore.
This has been a tad better than the last financial year (i.e. the period between April 1, 2011 and March 31, 2012) when the government had targeted to raise Rs 40,000 crore through the disinvestment of shares but finally managed to raise only Rs 13,894 crore.
What is interesting is that even the amount that will be raised by selling shares of the PSUs during the course of this financial year, wouldn’t have been raised if the government hadn’t forced the Life Insurance Corporation (LIC)of India to come to its rescue.
The insurance major is supposed to have bought 46% of the 69 million shares of RCF that were disinvested last week. LIC as expected denied that it had rescued the government. “We have not bailed out anyone. We have examined this (RCF) issue by its own strength and then taken a decision to participate. We will examine the future issues in a similar manner and then take a call,” D K Mehrotra, chairman of LIC, told Business Standard on March 13, 2013. In November 2012, LIC had come to the rescue of the government by picking up 43.6% of the nearly 52 million shares of Hindustan Copper that were being sold.
In March 2012, LIC had picked up 88.3% of the 427 million shares of ONGC that were being sold. When a government owned insurance company has to pick up 88% of the shares being sold, what it clearly tells you is that there was no real demand for the share in the stock market. The government thus raised around Rs 11,275 crore from LIC. The government was also expected to sell shares in Metals and Minerals Trading Corporation(MMTC) of India, but that has been postponed. The government and the merchant bankers of the issue could not agree on the price at which the shares of MMTC would be sold. The merchant bankers seem to have told the government that Rs 75 per share was a fair price of an MMTC share. The trouble though is that currently one MMTC share is worth around Rs 302 (as I write this) in the stock market.
But there is a simple explanation for this huge difference. As an editorial in Business Standard points out “However, rather than getting carried away with the wide gap between the market price and the fair value assigned to the company’s shares by merchant bankers, the government should note that the current stock price of MMTC Ltd is produced by market dynamics – but with constrained supply. Only 0.6 per cent of the stock is freely floating.”
The point is that the government is being greedy here. But that ‘greed’ of course comes with the confidence that LIC can always be made to buy these shares. The MMTC situation is similar to that of ONGC, where the shares were priced so high that the investors were simply not interested in buying it. As the Business Standard points out “ The government may have deferred the proposed stake sale in the state-owned mineral trading company MMTC Ltd over valuation differences with merchant bankers, but it would do well to recall the debacle associated with the share sale of the state-controlled oil company ONGC last March. On that occasion, the government priced ONGC’s shares at Rs 290 each; institutional investors saw little value in bidding for them at that price – higher than the market price that was prevailing then. The government had to ask the Life Insurance Corporation of India to bail out the issue.”
The disinvestment of other companies like Steel Authority of India Ltd (SAIL) and National Aluminium Company Ltd (NALCO) also seems to be in trouble. The share price of both these companies is currently at more or less their one year low levels. The same stands true for MMTC as well.
What the ONGC experience hopefully must have taught the government is that while selling shares of a company which is already listed on the stock exchange it cannot demand a price that is higher than the price the share is selling at, in the stock market. So if a share is selling at a price of Rs 100, the government cannot demand Rs 120, simply because the investor has the option of buying the share from the stock market.
Given this, it means that if the government wants to sell the shares of SAIL, MMTC and NALCO, it will have to sell them at a price which is lower than their market price to make it an attractive proposition for investors. And since the market price is at around the one year low level, the government will be unable to raise as much money from these stake sales as it had expected to. Of course the government can always dump these shares on LIC , which would be more than happy to buy it. The disinvestment of NALCO which is located primarily in Orissa is being opposed by the ruling party in the state, the Biju Janta Dal.
There are several points that stand out here. If the government is having so much trouble achieving a scaled down disinvestment target of Rs 24,000 crore for this year, how will it achieve the target of Rs 54,000 crore which it has set for itself in the next financial year? It also raises the question that was a high figure of Rs 54,000 crore just assumed to project a lower fiscal deficit for the next year?
The second point is that at Rs 54,000 crore, disinvestment receipts are expected to bring in 6% of the total revenues of the government during the next financial year. This a rather huge number to be left to the vagaries of something as moody as the stock market. The government is only doing this because it is confident that it can get LIC to pick up the tab if the stock market is not interested.
In fact that is why it has passed a special regulation allowing LIC to own upto 30% of shares in a company against the earlier 10%. This in a scenario where the other insurance companies can own only upto 10% of a listed company. How can there be two separate rules for companies in the same line of business?
Also what happens in a situation when LIC ends up investing in a company which turns out to be a dud? Imagine what would happen when LIC decides to get out of the shares of such a company. The stock price of the company will fall, impacting returns of investors who have bought insurance plans from LIC. As the old saying goes, “putting all eggs in one basket” is a pretty risky proposition and goes against the basic principles of investing. What makes the situation even more dangerous is the fact that it is public money that is at stake.
Also when LIC has to anyway pick up these shares why go through this entire charade of disinvestment in the first place? The government can simply sell these shares directly to LIC and get done with it.
There is another basic issue here. Amay Hattangadi and Swanand Kelkar of Morgan Stanley Investment Management point this out in a report titled Connecting the Dots: “As trained Accountants, we have learnt that sale of Assets from the Balance Sheet are one-off or non-recurring items.”
In simple English what this means is that shares once sold cannot be resold. By selling shares the government is raising a one time revenue. On the other hand, using this revenue it is committing to expenditure which is more or less permanent. And that really can’t be a good thing in the long run.
But politicians really don’t live for the long run. They survive election by election. And there is one due next year.
The article originally appeared on www.firstpost.com on March 14, 2013. 
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why you should not believe LIC’s bulls**t on Ulips

LIC
Vivek Kaul
 
 
Patrick Jake O’Rourke an American political satirist and journalist recounts a very interesting story in his book Age and Guile – Beat Youth, Innocence and a Bad Haircut.
It was 1969 and O’Rourke had applied for a fellowship. To get the fellowship he had to clear an interview at the Ohio State University English Department.
On reaching there he was asked “Which literary critic has had the most profound influence on your thinking?”
“I could not think of the name of a single literary critic,” recalls O’Rourke in the book. But of course he had to say something, which he did.
“Henry David Thoreau,” was his answer to the question. Thoreau was an American poet, author and philosopher.
“Henry David Thoreau wasn’t a literary critic,” the board interviewing him rightly pointed out.
“His whole life was an act of literary criticism,” retorted O’Rourke.
He got the scholarship. “Well, it was 1969. Bullshit was an intellectual mainstay of the era,” he writes.
Bullshitting or BS as it is more euphemistically referred to as is a very important part of life in general and corporate life in particular. If one needs to survive and get out of tricky situations, learning how to give bullshit as well as decipher it is, very important.
Take the case of the decision made by the Life Insurance Corporation of India to relaunch Unit Linked Insurance Plans (Ulips) after a gap of nearly two years. Ulips are essentially high cost mutual funds masquerading as insurance. A major part of the premium collected through selling Ulips is invested in the stock market.
As the Business Standard reports today “The intention is to take advantage of the bullishness in the stock market. Sources familiar with the developments said this would also help the insurer attain its target of Rs 45,000 crore of new premium income collection in 2012-13 and increase its market share.”
Now this is what one would call bullshitting. Giving out every reason for a decision except the real one. And what is the real reason for LIC suddenly deciding to launch Ulips?
The real reason for LIC suddenly deciding to launch Ulips is the disinvestment programme of the government. At the beginning of the year the government had targeted to raise Rs 30,000 crore by selling shares of public sector enterprises to investors.
But now that number will have to go up due to several reasons. The government has been spending money at a faster rate than it had envisaged. The fiscal deficit during the first six months of the year had already reached 65% of the targeted amount of Rs 5,13,590 crore.
The tax collections have slowed down and only 40% of the projected amount has been collected during the first six months of the year.
Also, the auction of telecom spectrum through which the government had plans of raising Rs 40,000 crore has turned out to be a damp squib. The government could collect only Rs 1,707 crore or around 4.3% of the targeted amount.
This means a short fall of nearly Rs 38,300 crore which will now have to be most probably made up through the disinvestment route. Hence, a total of around at least Rs 68,000 crore (Rs 38,300 crore + the earlier target of Rs 30,000 crore) will now have to be raised through disinvestment.
This means the government will have to sell shares of a lot of public sector companies to investors. But the question is whether investors have an appetite for it?
And the answer is no given the current mess that the government is in. This is where LIC comes in. India’s biggest insurer bought a major part of the recent sale of shares of Hindustan Copper Ltd by the government and thus rescued its disinvestment.
And this is something that LIC is expected to do over and over again till March 31, 2012 and help the government meet its disinvestment target. Recently the government allowed LIC to own up to 30% of a company against the earlier stipulated limit of 10%.
Hence, LIC will end up buying shares which the government wants it to buy rather than the shares it should be buying from the point of view of generating good returns for its investors. Given this, LIC needs money which has the mandate to be invested in equity. The premium that it collects through its traditional endowment plans needs to be invested in safer avenues like government securities and loans raised by the best companies.
This money cannot be invested in the stock market. The money raised through selling Ulips can be invested in stocks. And that is the kind of money that LIC needs right now. Thus the decision to launch Ulips after a two year hiatus.
Also the last three months of the financial year are the best time to sell Ulips or any other kind of insurance plan, given that this is the time most people get around to doing their tax planning and investing money in tax saving avenues, insurance is one of which.
Ulips were the wonder drug for the insurance industry for a very long period of time until investors started figuring out that the only person gaining from the Ulip was the insurance agent. Also, the clamp down by Insurance Regulatory and Development Authority (IRDA) of India, the insurance regulator, on Ulip commissions, pushed insurance agents towards traditional insurance plans which continue to pay a high commission.
Now Ulips are all set to act as the wonder drug for the government. The money raised by LIC by selling its new Ulips is likely to be invested in the shares of the public sector units the government plans to sell to meet its disinvestment target.
It’s a win a win proposition for everyone. The government gets its easy money. LIC gets new premium on which it charges a management fee to manage that money. The insurance agent makes the commission. The only person losing out, as always, is the person buying the Ulip, who ends up indirectly owning shares that no one else in the market wants to buy. But then who was bothered about him anyway? He could always be bullshitted and told it was all for his own good.
Today’sEconomic Times says that the LIC lost over Rs 5,000 crore by buying public sector shares of ONGC, NMDC and NTPC.
But DK Mehrotra, chairman, LIC had told Business Standard on an earlier occasion “Ulip has its own advantages, it gives you fast returns.” But the question Mehrotra does not answer is faster returns for whom? It clearly isn’t the Ulip investor.
Hence, dear reader it is important that you decipher this bullshit and allocate your hard earned money somewhere else. 
The article originally appeared on www.firstpost.com on December 4, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])
 
 

Govt will use your LIC money to offload PSU shares – again


Vivek Kaul
When the going gets tough, the government gets desperate.
The recent auction of the 2G telecom spectrum was supposed to raise Rs 40,000 crore. It hardly raised anything close to that amount.
The disinvestment process which is supposed to raise Rs 30,000 crore during the course of the year has not raised a single rupee nearly eight months into the year.
Also what does not help is the fact that the amount of tax collected seems to be slowing down. As economist Shankar Acharya recently wrote in the Business Standard:“By end September the government’s tax receipts amounted to less than 40 percent of the year’s Budget target.”
During the first half of the financial year (i.e. between April 1 and September 30) the fiscal deficit was at Rs 3,36,000 crore or 65.6% of the targeted fiscal deficit of Rs 5,13,590 crore. Fiscal deficit is essentially the difference between what the government earns and what it spends.
What all this tells us is that the government of India is spending more and more money and is not earning enough of it. Also it is not in a position to control it expenditure.
And that has made it desperate enough to bend its own rules. The Economic Times reports that the finance ministry has allowed Life Insurance Corporation of India to own upto 25% of a listed company. The Insurance Regulatory and Development Authority(Irda) of India, the insurance regulator, allows insurance companies to own up to 10% stake in a listed company.
Irda has blasted the government for going ahead with this decision. As The Economic Times reports “The Insurance Regulatory & Developmental Authority, which had in 2008 amended investment norms to prohibit an insurer from holding more than a 10% stake in a company, openly criticised the government’s decision, with Chairman J Hari Narayan saying it was against prudence. “It is against the (Irda) Act and against any prudence,” he said.”
And for once I agree with Irda. There are multiple reasons for the same.  As George Orwell wrote in Animal Farm “All animals are equal, but some animals are more equal than others.” The government is working on this principle by allowing LIC of India to own up to 25% of a listed company when the other insurance companies can own only up to 10% of a listed company. There can’t be two separate rules for companies in the same line of business, which is insurance in this case.
Also what happens in a situation when LIC ends up investing in a company which turns out to be a dud? Imagine what would happen when LIC decides to get out of the shares of such a company. The stock price of the company will fall impacting returns of investors who have bought insurance plans from LIC. As the old saying goes “putting all eggs in one basket” is a pretty risky proposition and goes against the basic principles of investing.
So the question is why is the government going ahead with a move which is fundamentally so wrong? As Hari Narayan toldThe Economic Times “They have to understand the gravity of the issue and the potential danger…I do not agree with the government.”
But the thing is that the government is desperate to raise money one way or another. Its attempts at selling the 2G telecom spectrum have flopped miserably. It also knows that with all the scams its credibility is at an all time low. And if it tries to sell shares of public sector companies in the open market, the process might flop in the same way that the recent 2G spectrum auction did.
Hence, in this scenario the biggest hope for the government is LIC. The trouble of course is that in some of the companies that the government wants to sell shares of, LIC may already have a stake which is close to the mandated 10%. So to get around this the government has raised it to 25%.
As The Economic Times put it “The enhanced limit could herald good news for the struggling disinvestment programme as the finance ministry could lean on state-run LIC, the largest insurer, to deploy its funds to buy hefty stakes in public sector companies that the government may find hard to sell in the open market.”
So the government is getting ready to dump its stake in various public sector units to LIC. Money is being moved from one arm of the government (LIC) to another(the central government’s annual budget).
As I had written in another piece recently when it comes to LIC it is best placed to carry out such operations in the last three months of the financial year (i.e. between January and March). At that point of the year people start seriously thinking about their tax saving investments and in large parts of the country that means buying a new LIC policy or paying the premium for the existing ones. And that’s when the insurance behemoth has a lot of cash which can be used to rescue the government by picking up shares of companies that it decides to disinvest. Given this, the change from 10% to 25% has been made just at the right time.
The only loser in the process is the individual who puts up his hard earned money into insurance plans of LIC and ends up financing the fiscal deficit of the government. This is nothing but another form of “financial repression” where the premium that Indians pay towards their LIC insurance policies will end up financing the fiscal deficit of the government.
Hence, don’t be surprised if you LIC agents aggressively marketing unit linked insurance plans (Ulips) which invest in stocks very aggressively for the remaining part of the year. They will have no other option. The instructions will come from right at the top.
Also what this does not do anything about the basic problem which is that the Indian government is spending much more than what it can write cheques for.
The article originally appeared on www.firstpost.com on November 21, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])